Asia-Pacific airlines are facing a prolonged squeeze from high jet fuel prices as older hedging contracts expire, leaving carriers exposed to a market that has stayed far above pre-crisis levels.

The spot price of jet fuel is trading at about $148 a barrel, down from nearly $180 at the end of October but still far higher than the level of about $85 seen before the Iran war began in late February, Reuters reported on Friday.

Fuel now makes up about 33 per cent of airlines' operating costs, according to Wong Hong, director general of the Association of Asia Pacific Airlines (AAPA), which represents 18 of the region's carriers. The global industry group IATA had put the share at 25 per cent last year, before prices surged.

Wong described hedging, the practice of locking in future fuel prices in advance, as a "very, very tricky dilemma" for airlines deciding whether to take cover at today's elevated levels.

Hedges that protected airlines are running out

Airlines that had hedging contracts in place over the past six to eight months were "coming out smelling like a rose", Wong said, but they now face the prospect of re-hedging at higher prices.

Executives attending AAPA's annual assembly in Kuala Lumpur this week differed over how long the pressure would last. The assembly, hosted by Malaysia Airlines on 12 and 13 November, brought together more than 170 delegates from across the region under the theme "Redefining Aviation: Growth, Resilience and Innovation".

Air Astana chief executive Ibrahim Canliel told Reuters the industry faced a new reality. "Our view is that we are facing a new normal where the fuel price is there to stay at the levels that we see more or less today," he said, referring to Brent oil prices of about $90 to $100 a barrel.

The Kazakh carrier's first-half hedges have expired, and prices were at levels that "did not make sense" to lock in new cover, Canliel said. The airline still plans to rebuild its position, aiming to hedge all of the fuel it buys outside Kazakhstan, about 30 per cent of its total in a typical year.

Japanese carriers weigh surcharges

Japan Airlines expects fuel prices to fluctuate, senior managing executive officer Ross Leggett told Reuters. "We still think it will be cyclical. It's going to go up and down," he said, adding that the airline was budgeting for a "worst-case scenario" of $160 a barrel for jet fuel, the average price it paid from April to September.

Leggett said Japan Airlines would introduce a domestic fuel surcharge from April next year, a first for the carrier, after concluding it could no longer rely on government fuel subsidies indefinitely.

All Nippon Airways faces a similar strain. Its chief executive, Juichi Hirasawa, said the airline's fuel costs would rise by 100 billion yen ($626 million) this fiscal year above initial plans, although he expected the fuel market to stabilise in the second half of the financial year ending 31 March.

Both ANA and Japan Airlines hedge only domestic fuel consumption and rely on fuel surcharges and ticket price changes to cover international exposure. Neither airline signalled any change to that approach. Hirasawa said a domestic surcharge was "under consideration" at ANA, but competition from bullet trains made the decision difficult.

Passengers and profits feel the strain

With oil prices rising, ticket prices have also climbed, but not always fast enough to cover the higher fuel costs. "There has to be a breaking point where passengers will say no," Wong said.

Asia-Pacific passenger growth was negative in aggregate from April to August, with September "just above water", Wong said, adding that capacity cuts were "clearly a potential risk". The AAPA said passenger demand grew by 1.9 per cent in the first nine months of the year, with average load factors reaching a record 83 per cent.

Singapore Airlines shows how margins have been squeezed even at carriers with substantial hedging. Its fuel bill jumped 56 per cent in the six months to September, to S$3.97 billion ($3.09 billion), cutting operating profit by 29 per cent even as revenue hit a record.

Singapore Airlines paid an average of $171 a barrel before hedging, up 87 per cent year on year. Hedging gains of S$731 million, against a S$75 million loss a year ago, cut the effective price to $145 a barrel, but chief financial officer JoAnn Tan said hedging "only offers some level of protection".

"No one can predict fuel prices, which is why we hedged," she said at an earnings briefing on Thursday.

Sources: Reuters and Payload Asia